LONDON, Oct 6 (Reuters) - The dollar edged higher on Friday
and is on track for its fourth consecutive week of gains as
investors continued to cut their short bets against the
greenback on a growing view that bond markets have underpriced
the extent of U.S. rate increases.

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Outflows from U.S. Treasury bonds picked up pace and the
U.S. bond yield curve steepened, prompting the dollar to extend
its near 3 percent rise over the last month against a
broad-trade weighted basket of currencies

"We are thinking that the dollar bounce has further to go
because in our view, the market continues to underprice the
possibility of a December fed hike, so the dollar has further to
go," said Alvin Tan, am FX strategist at Societe Generale in
London.

Solid U.S. economic data, along with the prospect of U.S.
tax cuts and growing expectations that a hawkish candidate will
replace Janet Yellen as Federal Reserve Chair when she steps
down in February 2018, have combined to given a lift to the
dollar in recent weeks. [nL4N1MF3AX

The dollar index, which measures the greenback's value
against a basket of six major currencies, edged up 0.1 percent
to 94.03.

It rose to 94.112 at one point on Friday, its strongest
level since mid-August and has risen more than 3 percent from
2-1/2 year low of 91.011 hit in early January.

SHORT SQUEEZE

Bank of America Merrill Lynch strategists say latest flow
data in the week of Oct. 5 shows that Fed rate hike expectations
have caused a broad rotation from U.S. Treasury debt to
investment grade bonds. The former saw their biggest weekly
outflows in 31 weeks.

The U.S. Treasury yield curve has also steepened in recent
weeks, with yields on debt maturing in 5 to 10 years rising
between 20-30 basis points in that period, indicating rate hike
expectations are gradually becoming more broad-based.

"Some very short positions are being reduced as markets are
coming around to the view that the bond markets are not
reflecting the likelihood that the Fed may raise interest rates
more than what is currently reflected," said Thu Lan Nguyen, an
FX strategist at Commerzbank AG in Frankfurt.

The latest Reuters poll this week showed the greenback will
at best be where it is now in three, six, and 12 months as
predictions were largely unchanged, suggesting the current rally
will mostly be short-lived.

But some traders believe the current dollar rally may have
more legs if President Donald Trump appoints a hawkish U.S.
Federal Reserve chair.

Oxford Economics assigns a 40 percent probability to Kevin
Warsh as the next U.S. Federal Reserve Chair, a candidate
increasingly perceived as hawkish by the markets.

But futures markets are giving only a 40 percent probability
to two rate hikes over the next 12 months, a likelihood that may
change dramatically and kick U.S. Treasury yields and the
greenback higher if the data improves.

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The last time the dollar enjoyed a four-week rising streak
was back in late-February when expectations of major U.S. tax
reforms were at a fever pitch, but the dollar tanked more than
10 percent in the subsequent months as those expectations faded.

The short-term focus is on U.S. job data for September, due
later on Friday. The data is expected to show a slowdown in jobs
growth, reflecting the effects from Hurricane Harvey and Irma.

According to a Reuters survey of economists, the jobs data
will likely show that nonfarm payrolls increased by 90,000 jobs
last month after rising by 156,000 in August.

Elsewhere, sterling fell 0.4 percent to one-month
lows in early trade to $1.3063 as investors worried about
rising political uncertainty.

For Reuters Live Markets blog on European and UK stock
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